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Stock Split for Google That Cements Control at the Top

By Andrew Ross Sorkin April 16, 2012 9:14 pmApril 16, 2012 9:14 pm

Ryan Anson/Bloomberg NewsLarry Page changed his mind about a stock split for Google.

“It’s stupid,” Larry Page, Google’s co-founder and chief executive, exclaimed about the prospect of splitting the company’s shares. “If you own 10 shares at $40 or one share at $400, it’s the same thing! You just need to know how to divide.”

That’s the way Mr. Page reacted to the suggestion that Google pursue a stock split when an employee raised the question several years ago, as Ken Auletta recounted in his book, “Googled: The End of the World as We Know It.”

So it came as a surprise last week when Mr. Page reversed himself. In fact, he pressured the board to split Google’s highflying shares 2 for 1.

But make no mistake, he wasn’t doing it for shareholders, who have long been pushing for a stock split to make Google’s shares a bit more affordable, given that they have been hovering around a whopping $650 each.

He was doing it for himself.

Cleverly, Mr. Page, along with his other co-founder, Sergey Brin, and the company’s chairman, Eric E. Schmidt, created the stock split so that Google could issue a special new class of shares to current shareholders. The catch: the new class of shares has no voting rights.

In other words, the entire point of the stock split was to solidify the founders’ control of the company by diminishing the future voting power of the shareholders. So even as the founders continue a plan to sell some of their shares over the next three years through a program they enacted in 2009 and the company continues to issue new shares to employees, they have developed a plan to retain an iron grip over Google.

And the decision can be made without a real vote, because, well, Mr. Page, Mr. Brin and Mr. Schmidt collectively already control 66 percent of the vote through special Class B shares. Actually, Google says it will go through the motions of a vote at its annual meeting — call it shareholder theater — but shareholders need not bother casting a ballot. As the company’s general counsel, David C. Drummond, said in a letter to shareholders, “Given that Larry, Sergey and Eric control the majority of voting power and support this proposal, we expect it to pass. “

At a time when shareholders are increasingly seeking a bigger voice and more democracy, Google is going the other way. And it’s creating a dangerous precedent that others have already begun to follow: Facebook’s coming initial public stock offering is structured so that Mark Zuckerberg will hold a tight control over the company.

(Zynga and several other technology companies followed a similar path.)

So far, shareholders, oddly, don’t seem to be too upset. Google’s shareholders have been more focused on the company’s results, which have been largely positive.

While leaving control with Google’s founders might be fine right now, there will very likely come a day when its shareholders will regret not blinking at what could be called “anti-good corporate governance.”

Just think about other once highflying technology companies that turned sour. Yahoo. Or Research in Motion. Its founders were once lionized as visionaries — until they weren’t. The problem is that Google will succeed until it doesn’t. And when it falters, it won’t have the kick in the pants that the prospect of pressure from shareholders can provide.

Perhaps it’s not surprising that Google’s shareholders aren’t up in arms, considering that when Google went public in 2004, the founders made it very clear that, through a dual-class share structure, they intended to maintain control of the company.

Back then, Google’s founders justified the share structure by saying, “We want Google to become an important and significant institution. That takes time, stability and independence.”

They added, “In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google.”

Now, eight years on, it’s probably safe to say that Google’s “transition to public ownership” and its plan for “Google to become an important and significant institution” have already happened quite successfully.

So it seems disingenuous for the co-founders to now say that they need to change the corporate structure yet again so that they will be able to keep control in perpetuity.

To its credit, Google has been upfront about its plan. “We recognize that some people, particularly those who opposed this structure at the start, won’t support this change — and we understand that other companies have been very successful with more traditional governance models,” Mr. Page and Mr. Brin wrote. “But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users.”

Some corporate governance experts have even praised the move. Bill George, a professor at Harvard Business School and a director of Goldman Sachs and Exxon Mobil, said in an e-mail exchange that he had not been in favor of dual-class stock setups that serve to protect complacent owners or managers, but that he admires companies “with the courage to take a stand for ensuring their companies are competitive for the long term.”

“As the pressures from short-term shareholders for immediate results have grown, I believe that they have a place if used selectively,” Mr. George wrote.

What’s perhaps most interesting about Mr. Page’s and Mr. Brin’s letter to shareholders is they invoke the approval of the independent members of Google’s board to justify the move.

Yes, it is true that the independent board members met 16 times over 15 months to discuss this structure. It is also true that Google’s board unanimously approved the maneuver.

But it must be said that Google’s board serves at the pleasure of the company’s founders. The only likely alternative to voting “yes” would have been to resign and explain why you voted “no.” Or they most likely would not have found their names on the board nomination list next year.

Given the makeup of the rest of the board — two venture capitalists, the chief executive of Intel, the presidents of Stanford and Princeton and a former Pixar executive now a professional board member (she’s on four boards) — it is hard to see how the outcome could have been different.

Google said its executives and directors would not comment for this column.

To be fair, the board did negotiate a special “stapling” arrangement so that Google’s founders can’t sell down their economic interest in the future without selling voting shares, too. We’ll see how that works out — a couple of years from now, the founders could again change the rules.

When Google first pursued its initial public offering in 2004, the company’s founders said their motto was “Don’t be evil.”